Look for hog margins to turn lower in 2018

Hog Outlook: Narrower margins are likely next year vs. now.

Jul 14, 2017

By Chris Hurt

Now that we have reached the last half of 2017, it is time to look at 2018 prospects for the pork industry. On my first evaluation for next year, it looks like profit margins could narrow. That may be driven by somewhat lower hog prices and higher costs of production related to increased corn costs.

First, let’s take a look at the past few years. The graph below shows my estimates of margins per head by quarter going back to 2014. Farrow-to-finish hog producers made a lot of money back in 2014. Or rather, we should say producers who were not affected by the porcine epidemic diarrhea virus made a lot of money. If you remember, PEDV cut pork production by 8% to 10%, and hog prices soared. High prices provided record profits for those without major losses from the disease.

The industry returned to reality beginning in 2015, and has been traveling more of a breakeven path. Breakeven is a sustainable return since all costs of production are included for the average hog producer.

The years 2015 to 2018 show some consistencies. First, there is seasonality, with the best margins in the second and the third quarters. Warm weather months tend to see higher hog prices. The lowest margins come in the first and the fourth quarters, with cool weather months and lower hog prices. Secondly, quarterly margins have bounced up and down from breakeven, but generally have not been extremely high or low. Perhaps the fourth quarter of 2016 was an exception.

Lean hog prices this summer have been strong, with an expected third-quarter average in the low $70s. Prices for the fourth quarter are expected to drop to the lower $60s. In the first and second quarters next year, prices are expected to recover into the mid- to upper $60s. Prices for 2017 may average from $64 to $67, but fall to an average between $62 and $66 in 2018.

2018 crystal ballRight now it looks like 2018 corn costs will be about 40 cents per bushel higher than for the calendar year of 2017. Soybean meal prices are expected to be similar for the calendar years of 2017 and 2018. Prices may average about $315 per ton for high-protein meal at Decatur, Ill. Final yields for our current crops will still be important in determining crop size and prices.

The bottom line is that it is still early to make accurate estimates for 2018. We can expect at least 3% more pork in 2018 from a modest expansion of the sow herd, more pigs per litter and higher market weights. Feed costs may rise in 2018 due to higher corn prices.

Margins in 2018 are now estimated to result in about a $7-per-head loss, compared with around $4 per head of profit in 2017. This would mean margins will tighten. Producers will need to work on cost control, maintain high productivity and be cautious about further expansion.